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What is the Beyond Budgeting model? Description
Working with budgets, as practiced in most
corporations, should be abolished. That may sound like a radical proposition,
but it is merely a step in a long running battle to change organizations
from centralized hierarchies towards devolved networks. Most of the other
building blocks are in place. Firms have invested huge sums in quality programs,
IT networks, process reengineering, and a range of management tools including
EVA, balanced scorecards, and activity accounting. But they are unable to
realize the new ideas, because the budget, and the command and control culture
it supports, remains predominant.
Beyond Budgeting (BB) is an alternative
that is more adaptive and devolved. It replaces the budgeting model with
a more adaptive and devolved alternative. Criticizing budgets is not new.
But to define a set of principles, that guides leaders towards a new management
model, that is lean, adaptive and ethical, is.
Origin of the Beyond Budgeting method. History
The BBRT (Beyond Budgeting Round Table) was established in 1998 in response
to growing dissatisfaction, indeed frustration, with traditional budgeting.
The BBRT community successfully addressed three major questions:
- Is there an alternative to budgeting? - Yes.
- Is there a better management model? - Yes.
- How should it be implemented? - This is the main focus now.
Examples of Beyond Budgeting. Applications
Organizations of any size and industry can use BB. Some examples include:
- Toyota, the Japanese automotive manufacturer, Svenska Handelsbanken,
the Swedish bank, Aldi, the German retailer, and Southwest Airlines, the
American airline.
- Other less well known exemplars are Ahlsell, the Swedish building materials
wholesaler, and ISS, the international Danish facilities service group.
- World Bank
- Small Non-profit: Sightsavers International, a UK charity.
Steps in the Beyond Budgeting model. Principles
BB is not a process. It is a management model based on two sets of principles.
The six principles of managing with adaptive management processes
are:
- Goals are based on maximizing performance potential.
- Base evaluation and rewards on relative improvement contracts with hindsight.
- Make action planning a continuous and inclusive process.
- Make resources available as required.
- Coordinate cross-company actions according to prevailing customer demand.
- Base controls on effective governance and on a range of relative performance
indicators.
The six devolution-based principles:
- Provide a governance framework based on clear principles and boundaries.
- Create a high-performance climate based on relative success.
- Give people freedom to make local decisions that are consistent with
governance principles and the organization's goals.
- Place the responsibility for value creation decisions at front line
teams.
- Make people accountable for customer outcomes.
- Support open and ethical information systems that provide "one truth"
throughout the organization.
Strengths of Beyond Budgeting. Benefits
- Faster response. BB companies operate with speed and simplicity,
and simplicity comes from reducing complexity in the management process.
This can best be achieved by giving managers the scope to act immediately
and decisively within clear principles, values and strategic boundaries.
Operating within a flexible network is also important as it enables managers
to respond quickly to customized requests by reconfiguring processes. But
making strategy an open, continuous and adaptive process is perhaps the
key element in a fast response organization. It enables the firm to react
to emerging threats and opportunities as they arise rather than being constrained
by a fixed and outdated plan. To this extent regular rolling forecasts can
be helpful and access to resources when they are needed can be critical.
Underlying all these approaches is the shredding of the bureaucracy that
still plagues most large organizations
- Innovative strategies. In BB companies, people work within an
open and self-questioning environment. Clear governance principles set the
right climate and builds the mutual trust needed to share knowledge and
best practices. This is also encouraged by moving away from rewards based
on budget 'cells' (a formidable barrier to a sharing culture). And by moving
toward rewards based on the results of a business unit or group. The knowledge
sharing imperative is often driven by the need to achieve ambitious goals.
This can even lead companies to exchanging knowledge with suppliers and
contractors that, in earlier times, were seen as adversaries. (Compare:
Co-opetition)
- Lower costs. Only by seeing operating processes as supplier-customer
relationships will managers respond to demands for improvement in quality
and cost. And only by eradication of the budgeting mentality, will managers
be encouraged to challenge fixed costs and seek sustainable cost reductions.
Beyond budgeting companies have lower costs. Not only do they connect the
work that people do with customer needs, but they also align products, processes,
projects, and structures with their strategy. Operating managers also challenge
resources used rather than seeing them as 'entitlements'. Just asking the
question, "Does it add value to the customer?" is often sufficient to ensure
that unnecessary work is eliminated.
- More loyal customers. BB companies place customer value needs
at the centre of their strategy and adapt their processes to satisfying
them. Fast response to customer requests is also important. Thus people
at the front line must have the authority to make quick decisions. The 'right'
customers must also be profitable. Thus measuring order line profitability
is crucial, after charging all costs which are serving customers.
Limitations of Beyond Budgeting. Disadvantages
It is difficult to say categorically whether any one program of change
(even with the benefit of hindsight) leads to a direct and measurable improvement
in shareholders' wealth within a given period of time. It is easier to say
what hasn't worked. For example, it is doubtful that many of the aggressive
expansion projects of the 1990s involving significant mergers and acquisitions
have improved the wealth of shareholders (except in the companies which they
acquired). But in a number of organizations that have migrated towards the
adaptive and decentralized model, their leaders have been adamant that it
was this switch that underpinned their performance transformation.
Assumptions of Beyond Budgeting. Conditions
- The Beyond Budgeting model enables a more decentralized way of managing.
In place of the traditional hierarchy and centralized leadership, it enables
decision-making and performance accountability to be devolved to line managers
and creates a self-managed working environment and a culture of personal
responsibility. This causes increased motivation, higher productivity and
better customer service.
Individually these two main features can produce significant benefits. But
in combination they can help to realize a leadership vision that until now
was strong on vision, but was weak on delivery.
- Because BB is a coherent model in which all of its components work in
harmony, it can produce outstanding and sustained success. This success
is driven by four direct value drivers: innovative strategies, low costs,
loyal and profitable customers, and ethical reporting. However, these drivers
will be ineffective unless front line people have the scope, knowledge and
power to deliver. The result is an organization that is lean, adaptive and
ethical and that has the potential to remain at the top of its peer group
league table.
Book: Robin Fraser,
Jeremy Hope - Beyond Budgeting -
Book: Thomas Johnson
- Profit Beyond Measure -
Book: Stephan H.
Haeckel - Adaptive Enterprise -
Book: Gary Cokins
- Activity-based Cost Management -
Book: Ricardo Semler
- The Seven-Day Weekend -
Book: Dieter Brandes
- Bare Essentials -
Book: Henry Mintzberg
- Rise and Fall of Strategic Planning -
Beyond Budgeting Special Interest Group
 Visit the Special Interest Group
Recent User Comments
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- India
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Budgeting for Guidance, not for Control |
"Budgeting by itself is not bad. It is the importance that some organisations give to budgeting that may drive some to despise it.
Without budgets we would be playing hockey and reacting to stimulus with no idea of impact of step. With budgets, management knows if it is in control.
Using budgets for centralized control has lot of disadvantages. The business environment is changing so fast that a decision about the future has all likelihood of going wrong unless it has flexibility. Budgeting figures are calculated much in advance and cannot and should not be used for absolute control. In an organisation culture where budgets are considered sacrosanct, people try to project beyond practical limits and justify end by spending accordingly. This can lead to situations where innovative ideas are not pursued because they could not be envisioned earlier.
Decisions should be based on current, not budgeted Evaluation of the need and should only be guided by overall budget." |
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Budget Monitoring |
"How should budgets be monitored?" |
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Budget definition |
"What precisely is a budget?" |
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Beyond Budgeting Education & Events
Compare with Beyond Budgeting:
Balanced Scorecard |
Managing for Value |
Activity Based Costing |
Business Intelligence
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People CMM
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Adaptive Management | Decentralization
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